TOPIC 3

TAX DEDUCTIONS
OUTLINE
• General Principles
• Tests - Revenue or Capital Expenditure
• General Deduction Guidelines – S14
• Deductions Specifically Allowed – S14
• Deductible Expenses Subject to Restrictions
• Prohibited Expenses – S15
• Special Deductions
• Further Deductions
• Donations
GENERAL PRINCIPLES
• A tax deductible expense-

revenue

Under
S14
Not be
prohibited
by S15
REVENUE OR CAPITAL?
• Is there a sufficient link to the income-earning operations
• Is the expenditure made once-and-for-all with a view to
procure an asset or advantage for the enduring benefit of the
trade, or is it recurrent in the nature of operational expenses?
• Is the expenditure relating to circulating capital (inventories)
or fixed capital (fixed assets)?
S14 - GENERAL DEDUCTION GUIDELINES

“For the purpose of ascertaining the income of any person

for any period from any source chargeable with tax under
this Act, there shall be deducted all outgoing and expenses
wholly and exclusively incurred during that period by that
person in the production of income, including.…..”
GENERAL DEDUCTION GUIDELINES
• Any source of income chargeable to tax
- not restricted to TBPV
- “related” expenses can be charged

• Outgoings and expenses

• Wholly and exclusively

- “wholly” – full quantum
- “exclusively” – motive of expenditure
GENERAL DEDUCTION FORMULA
Incurred

- Liability to pay has crystallised both in law (can be

enforceable) and quantum (certainty of amount)

- Does not mean “paid”

- Accounting provisions and allocations are not deductible

GENERAL DEDUCTION GUIDELINES
During that period
- Cannot be pre-commencement or post-cessation expenses
- Must be incurred in relevant basis period
- Expenses incurred prior to the date on which a business
commences operation are not allowable for tax purposes

Exception: “Concession for Enterprise Development, expenses

allowable if incurred from the first day of accounting year in which
business derives its first dollar of trading receipt
Enhanced Concession for Enterprise Development
Businesses are allowed to claim pre-commencement revenue expenses
incurred in the accounting year immediately preceding the accounting
year in which they earn the first dollar of business receipts i.e
• deemed date of commencement of business: a business will be
treated as having commenced its operations on the first day of the
basis period in which it earns its first dollar of business receipt
i. The revenue expenses incurred from the deemed date of
commencement of business are tax deductible.
ii. Businesses are allowed deduction for revenue expenses
incurred one year prior to the deemed date of commencement of
business.
• The above tax treatments are not applicable to investment making
companies (Section 10E of the Income Tax Act).
Enhanced Concession for Enterprise Development
(example) – source: IRAS

a business will be treated as having

commenced its operations on the
first day of the basis period in
which it earns its first dollar of
business receipt.
Revenue expenses incurred from 1
Jan 2018 are deductible

Businesses are allowed deduction for revenue

expenses incurred one year prior to the deemed date
of commencement of business. Revenue expenses
incurred from 1 Jan 2017 – 31 Dec 2017 are deductible
Enhanced Concession for Enterprise Development
(cont’d)
GENERAL DEDUCTION GUIDELINES

In the Production of Income

- Sufficient nexus between the expense incurred and

the income produced

- Relate to future income

- Source-by-source concept
GENERAL DEDUCTION GUIDELINES
Source-by-source concept

Trade Income S10(1)(a) 23,000

Interest income from debt

investments S10(1)(d) 8,000
Less: loan interest (2,300)
5,700
Rental S10(1)(f) 30,000
Less: property tax (12,000)
loan interest (15,000)
repairs (4,500)
insurance (2,000) 33,500 Nil
Statutory Income 28,700
DEDUCTIONS SPECIFICALLY ALLOWED
• Interest expense - S14(1)(a)
• Rent – S14(1)(b)
• Repairs – S14(1)(c)
• Bad and doubtful debts – S14(1)(d)
• Employer’s CPF / approved pension fund contributions –
S14(1)(e)(f)
• Zakat, fitrah or any religious due – S14(1)(g)
DEDUCTIONS SPECIFICALLY ALLOWED
Interest expense - S14(1)(a)

• Interest expense is deductible if the capital is employed in acquiring the

income chargeable to tax

Example: taxpayer can claim deduction of interest payable on loan

against rental & dividend income if the loan is used to acquire
properties or shares that produce the income

• Methods to compute non-deductible interest:

- Specific Identification method (Tracking approach)
- Total Asset Method (if unable to track)
(Non Income Producing Assets/Total Assets X Interest exp)
TAM - IRAS
TAM is applied to compute the amount of common interest expense attributable to
the investment property and interest-free loan to a related party
DEDUCTIONS SPECIFICALLY ALLOWED

Interest expense - S14(1)(a)

Interest incurred on loans to refinance earlier loans or borrowings is

strictly not deductible as the new loan is used to repay an existing loan

Admin concession: deductible if it is for genuine commercial reasons:

- Refinancing arrangement achieve an overall reduction in cost of

finance
- Refinancing necessary due to taxpayer’s financial position
DEDUCTIONS SPECIFICALLY ALLOWED
Rent - S14(1)(b)

• Rent payable is allowed in respect of any land or building

occupied for the purpose of acquiring income

• Where part of premise is occupied for non-business

purpose, the deduction would have to be apportioned
accordingly.

e.g. part of shophouse used as residence and for

business
DEDUCTIONS SPECIFICALLY ALLOWED
Repairs and renewals - S14(1)(c)
• Repairs and renewal of premises, plant, machinery or fixtures
employed in acquiring income are deductible

• Improvements are not allowable – S15(1)(d)

• Repairs on acquired assets - prima facie capital in nature and

not deductible UNLESS repairs are necessary to put the asset in a
position to produce income
DEDUCTIONS SPECIFICALLY ALLOWED
Bad debts - S14(1)(d)

Amounts written off as bad debts

- must be trade debts
- must previously be included as trading receipts in company’s income
for the relevant year
- must prove to the satisfaction of CIT that the debts are bad and
irrecoverable after taking reasonable measures
- Where deduction is granted and the amount is subsequently
recovered, the amount recovered will be treated as a trading receipt
 DEDUCTIONS SPECIFICALLY ALLOWED
FRS 109 Provision for bad and doubtful debts - S14(1)(d)

• To minimise tax adjustments, the tax treatment of financial assets and

liabilities on revenue account that are recognised and measured under FRS
109 will generally follow the accounting treatment.
• This tax treatment is termed as “FRS 109 tax treatment”.
• Companies which adopt FRS109 will no longer make general and specific
provisions for bad and doubtful debts.
• Any impairment on financial assets on revenue account will be allowed as a
deduction and any reversal will be taxed.

https://www.iras.gov.sg/irashome/Businesses/Companies/Working-out-Corporate-Income-Taxes/Specific-
topics/Adopting-Financial-Reporting-Standard--FRS--39-and-109-and-its-Tax-Implications/
DEDUCTIONS SPECIFICALLY ALLOWED
Employer’s CPF / Approved Pension Fund Contributions - S14(1)(e)(f)

To qualify for deductions, contributions must be:

• Made to an approved fund

• In respect of employees engaged in activities in relation to the
production of the income of the employer
• Obligatory – employment contract or rules of fund

Note: Employer’s CPF Rate – 17%

Monthly cap of $6,000 for ordinary wages and
Annual cap of $102,000 for total wages
DEDUCTIONS COMMONLY ALLOWED
Other allowable deductions

• Staff cost
• Entertainment & travel (business purposes)
• Advertisements
• Subscriptions to professional bodies
• Public transport
• Gifts
• Losses through theft, embezzlement
• Head office and management expenses
• Legal and professional fees
DEDUCTION ON EXCHANGE DIFFERENCES
• Arises when a transaction takes places in foreign currency
• Transactions: revenue or capital in nature
• Exchange differences: realised or unrealised
• Exchange gain/loss arising from a capital transaction or
unrealised exchange loss is not taxable / deductible
• Exception: IRAS will follow the taxpayer’s accounting
treatment for exchange diff on revenue account i.e.
exchange gains or losses on revenue account will be
taxable or deductible even if they are not realized.
• Can opt out (irrevocable)
DEDUCTION ON EXCHANGE DIFFERENCES

Foreign
Pay / receive
currency
Revenue
bank account
transactions
(DBA)

•Designated (foreign currency) bank account (DBA)used solely for the purpose of
receiving trade receipts and paying revenue expenses in a particular foreign currency
(“designated revenue purpose”)
•revenue in nature and foreign exchange differences arising from the revaluation of the
year-end balance of the designated bank account into the businesses’ functional
currency will be taxable or deductible.
DEDUCTION ON EXCHANGE DIFFERENCES
If the DBA is also used for other
purposes transactions, such as
Revenue
payment
purchase of fixed assets,
placement of fixed deposit etc,
Foreign then the exchange differences
currency arising from the revaluation of
bank account the year-end balance of the
(DBA) designated bank account into
Non-
revenue the businesses’ functional
payment currency will be non-taxable or
deductible
 DEDUCTION ON EXCHANGE DIFFERENCES – De-
minimis rule (New)
• Effective from YA 2020, IRAS is prepared to treat foreign exchange
differences arising from the revaluation of designated bank account
as revenue in nature even if the said designated bank account is
not maintained solely for revenue purpose.
• De-minimis limit:
i. Total number of capital transactions: not more than 12
transactions a year ; and
ii. Total value of capital transactions: not more than S$500,000 a
year.
• For the purpose of computing the total number and value of capital
transactions, the inflow and outflow of funds are to be added
together
DEDUCTION ON EXCHANGE DIFFERENCES – De-
minimis rule (Application)
Taxpayer used the excess fund for the following capital transactions in
the bank account for the year:
i) repay shareholder loan $300,000,
ii) make payment on behalf of a related party $50,000 and
iii) transfer to a fixed deposit account $200,000

• Number of capital transactions: 3 (Each outflow of fund is regarded as

a separate capital transaction)
• Total value of capital transactions: S$550,000 (S$300,000 + S$50,000
+S$200,000)
• Failed de-minimis rule >$500,000
• Tax treatment of the foreign exchange differences on revaluation of
foreign currency bank account: Capital in nature
Expenses Subject to Restriction – S14(2) to (8)
• Payments to family members – S14(2)
- only reasonable amount, having regard to services

• Medical expenses – S14(5) to (8)

- cap at 1% of total employees’ remuneration
- cap at 2% if company implements Portable Medical Benefits
Scheme (PMBS) or Transferable Medical Insurance Scheme (TMIS)
Medical Expenses – Employee remuneration?
Total Remuneration Total Remuneration
Includes: Excludes:
• Employees’ salaries, • Directors' fees;
allowances and bonuses • Medical expenses;
• Directors’ remuneration • Cash allowances in lieu of
• CPF contributions medical expenses;
• Benefits-in-kind;
• Skills development levy
(SDL);
• Foreign worker levy (FWL).
Medical expenses
• Maternity health care;
• Natal care;
• Preventive and therapeutic
treatment expenses;
• Provision of a medical clinic
by the employer;
• Cash allowance in lieu of
medical expenses;
• Dental expenses;
• Premium incurred on
medical and dental
insurance; and
• Contributions made by a
company to the employees'
CPF medisave accounts
PROHIBITED EXPENSES – S15
• Private expenses

• Expenses not incurred wholly and exclusively in production of

income

• Withdrawal of capital

• Expenditure employed in improvement

• Sum recoverable under insurance

• Rent or costs of repairs to any premises not incurred for production

of income
PROHIBITED EXPENSES – S15
• Income tax and tax penalty

• Input GST paid by person who is required, but failed to register

for GST; or if he is entitled to credit input GST

• Output GST borne by GST-registered person

• Motorcar expenses (except taxis, overseas cars, rental cars of

hiring companies, Q-plated cars and cars used for instructional
purposes)
Other Commonly Prohibited Expenses

- Deprecation and amortisation

- Donations
- Fines and penalties
- Formation and incorporation expenses
- Income tax appeals
- Pre-commencement expenses unless qualify for
concession
- Post-cessation or liquidation expenses
SPECIAL DEDUCTIONS

• Expenses would not have been deductible under S14

• Need to meet certain conditions and approval may be

required

• Examples
- Costs for protecting intellectual property (S14A)
- Research and Development expenditure (S14D)
- Renovation or refurbishment (R&R) works (S14Q)
SPECIAL DEDUCTIONS
Registration costs for protecting intellectual property (S14A)

• Registering costs on patents, trademarks, designs and plant varieties

(“qualifying intellectual property rights” or “IP”) are capital in nature –
non-deductible
• Concession:
• 200% deduction on up to $100,000 of qualifying IP registration
costs incurred for each YA
• 100% tax deduction will continue to be allowable on qualifying IP
registration costs incurred in excess of $100,000 for each YA
• Valid till YA 2025
 What are qualified registration costs
Registration Costs
• The registration costs qualifying for tax deduction are official fees and professional
fees .
Allowable Costs
• Examples of allowable costs include prior art searches and translation costs where
overseas intellectual property offices require documentation or specifications to be
submitted in their native languages.
Ownership of Intellectual Property Rights (IP)
• Tax deduction on registration costs is allowed on the condition that both the legal and
economic ownership of the IP must belong to the business entity in Singapore that
incurs and claims for the deduction.
• Economic ownership means the economic benefits from the exploitation of the
intellectual property will be accrued to the business entity.

https://www.iras.gov.sg/irashome/businesses/companies/working-out-corporate-income-taxes/business-expenses/tax-treatment-of-business-expenses--q---r-/#title1
 SPECIAL DEDUCTIONS
Research and development expenditure (S14D)

• Can deduct R&D expenditure incurred by a qualifying taxpayer

undertaken by taxpayer in-house or outsourced to an R&D organization
• Applies to both manufacturing and services
• For R&D outsourced to an R&D organisation, there must be an
undertaking by the claimant that any benefit arising from the R&D shall
accrue to him
• 250% tax deduction for staff costs and consumables incurred on
qualifying R&D projects performed in Spore up to 2025

https://www.iras.gov.sg/irashome/businesses/companies/working-out-corporate-income-taxes/business-expenses/tax-treatment-of-business-expenses--q---r-/#title1
DEDUCTIONS FOR RENOVATION &
REBURISHMENT (R&R) COSTS – S14Q
• R&R costs are not deductible unless they are repairs or replacements
with no element of improvement.
• R&R costs do not qualify for capital allowances (unless they form part
of an industrial building which qualifies for industrial building
allowances or Land Intensification allowances) because they are
incurred in relation to the business setting within which the business
is carried on and not on the provision of “plant and machinery”.

So how?
DEDUCTIONS FOR R&R COSTS – S14Q
• Any R&R costs that have not been claimed in the YA relating to the
basis period in which they were first incurred will not qualify for
deduction in the subsequent YAs.
• The expenditure cap is $300,000 for each 3 years period
• Any unutilised Section 14Q deduction can also be transferred under
the group relief system, losses carryback under loss carryback relief
and carryforward to set off against future assessable income subject
to shareholders’ test
DEDUCTIONS FOR R&R COSTS – S14Q
(example – source IRAS)
DEDUCTIONS FOR R&R COSTS – S14Q
Items that qualify for Section 14Q deduction includes:-
a) general electrical installation & wiring to supply electricity;
b) general lighting;
c) hot/cold water system (pipes, water tanks etc);
d) gas system;
e) kitchen fittings (sinks, pipes etc);
f) sanitary fittings (toilet bowls, urinals, plubming, toilet cubicles, vanity tops,
wash basins, etc);
g) doors, gates and roller shutters (manual or automated);
h) fixed partitions (glass or otherwise);
i) wall coverings (such as paint, wall-paper etc);
j) floorings (marble, tiles, laminated wood, parquet etc);
DEDUCTIONS FOR R&R COSTS – S14Q
k) false ceilings and cornices;
l) ornamental features or decorations that are not fine art (mirrors, drawings,
pictures, decorative columns etc.);
m) canopies or awnings (retractable or non-retractable);
n) windows (including the grilles etc.);
o) fitting rooms in retail outlets.

No Section 14Q deduction allowed on expenditure relating to:-

a) any designer fees or professional fees;
b) any antique; or
c) any type of fine art including painting, drawing, print, calligraphy, mosaic,
sculpture, pottery or art installation.
BUDGET 2021 - option to accelerate the
deduction of expenses incurred on R&R
• A taxpayer which incurs qualifying expenditure on R&R during the
basis period for YAs 2021 and 2022 (i.e. FYs 2020 and 2021) for the
purposes of its trade, profession or business will have an option to
claim R&R deduction in 1 YA (i.e. accelerated R&R deduction).
• The cap of $300,000 for every relevant period of 3 consecutive YAs
will still apply.
• If exercised, this option is irrevocable.
• Option will be in addition to the existing option currently available
under Section 14Q of the ITA.
Double Tax Deduction for Internationalisation
Scheme – S14B
• Encourage export and promotion of services overseas
• 200% tax deduction without approval on the first $150,000 of qualifying
expenses* incurred on qualifying activities* for each YA up to 31 Dec
2025
• Businesses should maintain documentation as proof of expenditure and
purpose.
• Expenditure exceeding the specified expenditure cap will require
approval from Enterprise Singapore or STB

*https://www.enterprisesg.gov.sg/-/media/esg/files/financial-assistance/tax-incentives/dtdi/qualifying-
activities-and-expenditure-available-for-dtdi.pdf?la=en
 DONATIONS
• Tax deductible donation made to Institute of a Public
Character (IPC) with no benefit in return

• Not deductible under Section 14, but claim 250% relief

under Section 37

• until 31 Dec 2023 (Budget 2021)

Qualifying Donations
Qualifying donation Donors

Outright cash donations made to an IPC or the Singapore Government for causes corporate and individual
that benefit the local community and do not give material benefit to the doners

Gifts of public shares listed on the Singapore Exchange (SGX) or of units in unit Individual
trusts traded in Singapore to approved IPCs

Approved gifts to museums of Approved Museum Status corporate and individual

Gifts of land or buildings to approved IPCs corporate and individual

Sculptures or works of art for public display to the National Heritage Board (NHB). corporate and individual
 Non- tax deductible DONATIONS
• If there is a benefit, the tax deduction is granted on the difference between the donation and
the benefit value and GST is to be accounted by the GST-registered recipient on the benefit
value

Advertisement such as
displaying banners, Donations or gifts that
products, to which the are for a "foreign
doner has donated is charitable purpose" (e.g.
regarded as advertising to overseas relief funds
or marketing and not a managed by an
donation approved IPC).

Non Tax
deductible
donation
 Example
Company A donated $10,000 to an IPC for their charity event and in return for doing this, it
was given advertising space at their event.
• As the benefit that comes from the advertising space is treated as having a commercial value, tax
deduction on the difference between the amount donated and the price of the advertising space
is allowed to the donor.

John made a donation to an IPC and he was entitled to a lucky draw to win a condo.
• Not a qualifying donation. This is not an outright cash donation as he is entitled to some form of
benefit, i.e. a chance to win prizes
 Concessionary Tax Treatment – Donations With
Benefits – effective from 19 March 2021
• Qualified Benefits given out in connection with a Charity gala
fundraising activity dinner

• Includes incidental benefits which are given as part

of the fundraising event and not intended for resale Lucky draws Charity shows
such as goodie bag, refreshment,
acknowledgements
• Lucky draw – top prize is at/below $2000 Qualified
• Tax deduction on the full amount donated and no benefits
GST needs to be accounted by the recipients Souvenir or
Golf
gifts (non-
tournament
resalable)

Complimentary
tickets (non-
resalable)

https://www.iras.gov.sg/irashome/uploadedFiles/IRASHome/Other_Taxes/Charities/Tax%20Treatment%20on%20Donations%20with%20Benefits%20(Donations%20made%20on%20or%20after
%2019%20March%202021).pdf
SUMMARY:-
• Understand why tax adjustments are required
• General deduction rules under S14
• The different types of deductions allowed and disallowed
• Restricted Deductions
• Special Deductions
• Donations
END